RESEARCH

Why Corporate Culture Is Hard

Shiva Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School and Vice Dean of Research

Tuesday 24 July 2018

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You might not expect a long-time researcher and professor of accounting and auditing and his colleagues in the same field to be studying a ‘soft’ topic such as culture. Yet, in some ways, it is corporate culture that found us.

The Unexpected Project

For more than ten years, my colleagues and I have been surveying CEOs and CFOs, exploring the financial and accounting challenges faced by today’s companies, large and small. And even in the context of issues such as financial reporting or disclosure or earnings management, many CEOs or financial executives would tell us, unprompted, “It’s not in our culture to do X,” and “It’s not in our culture to do Y.”

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We thus began to realize that culture is universally important, but nevertheless, we hesitated to launch a study of the topic for several reasons. First, it’s a difficult topic to capture: it’s hard to define—it means different things to different people—and it is hard to measure. Second, the topic is not part of the competitive advantage of our accounting and auditing discipline and might be better left to management strategy specialists. Finally, corporate culture is seen by many in my field as unscientific because it is often used as the residual claimant. In other words, if I can’t find some other reason to explain, for example, why banks fail, I might claim its culture as a culprit.

Despite these concerns, I, along with three colleagues from Duke University and NBER, Professors John Graham, Campbell Harvey, and Jillian Popadak, decided to conduct an in-depth survey of the concept of culture from the perspective of CEOs and CFOs. We began with a set of in-depth interviews with 18 corporate executives to identify the major questions and themes we wanted to cover in the survey. We then surveyed more than 1,300 executives in major firms.

And what we discovered was that financial executives see corporate culture as vitally important to organizations, but it takes a lot of hard work to get it right.

The Vital Importance of Corporate Culture

More than half of the senior executives we surveyed said that corporate culture is one of the top three drivers of firm value. And 92 percent said that improving their culture would increase their company’s value.

These are striking numbers. It’s important to emphasize that we were not talking to HR professionals or consultants who would quite naturally be predisposed to believe in the importance of their work. We were talking to CFOs, comptrollers, treasurers, and others related to the financial function.

These “hard numbers people” recognized the vital importance of corporate culture. They recognized that half the time, firm value and performance are linked to how you organize the goals for your division and your company and how you motivate people to get to those goals. It’s knowing how to make sure there’s not too much backstabbing or knowing how to run meetings so that they’re productive and focused. And increasingly, in a service-oriented world, as opposed to a manufacturing or industrial world, motivating executives to pull together towards a common purpose is even more critical than ever.

Unfortunately, while nearly every respondent said that improving culture would improve firm value, only 16 percent said that their culture was where it should be. And this very low number came from senior executives within the firms.

Focus on Values and Norms

So how can we turn this dismal statistic around? To begin with, we need to evaluate how culture is defined. The study of corporate culture often focuses on the formal policies that define the culture, for example: corporate governance; hiring, firing and promotion policies; and incentive compensation. However, as we learned from our respondents, the heart of culture is in the informal elements that are not written down or codified: specifically, the company’s values and norms.

In order for a culture to be effective, the respondents agreed, the company’s formal institutions have to align with and support these informal elements. In many firms, however, there is an apparent disconnect between informal values and norms and formal practices and policies. We heard consistent complaints from our respondents that their companies were not implementing their stated values in practice.

Walking the Talk Is Not So Easy

Of course, walking the talk can be easier said than done. Take promotion practices, for instance. You may have a star trader in an investment bank or a fantastic coder in a technology firm. This employee is difficult to manage, de-motivates others, and has trouble collaborating. But he is incredibly productive. How do you evaluate this person at the end of the year? Do you look to promote or “manage out” this person?

Situations like this one get played out every day in large companies. In addition, managers, by and large, have short horizons. They don’t intend to stay in the firm for 15 or 20 years, and many incentive plans only reinforce this short-termism.

As a result, decisions that may seem obvious in theory are not so obvious in the context of the real world. Management is hard. There are no easy answers. CEOs who want to instill an effective culture will need to be diligent and consistent when balancing the professed values and norms of their organizations with the pressures, goals, and responsibilities they face every day.

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